September 10, 2008

The 'Fannie and Freddie' factor faces our banks too

Posted in Banks · 37 comments ·
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Banks Cartoon
If the two biggest American mortgage banks can go bust and be bailed out by the US government, could the same happen here? When the US government intervened to save Freddie Mac and Fanny Mae on Monday, it put the world on notice. We are now in a new era where our banks are the single biggest weakness in the economy and the State (meaning the taxpayer) will be expected to save them.

The developments in America have serious implications for Ireland. If anything, our property boom was more ridiculous than that of the US. So the obvious question now is whether one of our banks might go bust. It could happen, but is it probable? We don’t know; but if it wasn’t a possibility, why has the share price of Irish banks fallen 60pc in the past year?

The reason share prices have collapsed is that investors are afraid their money will disappear. Like the rest of us, they don’t believe the banks’ management. They have lost faith in the business model and they are not going to risk their money. Internationally, some senior managers of banks have been exposed as frauds, who seemed to be totally out of touch with what was going on in the banks they were supposed to be running.

They constantly underestimated the losses they were facing and when they did finally acknowledge malpractice (well after shareholders lost their shirts), it was too late. Now no one believes anything stated by banks.

As Bill Gross, of Pimco — one of the biggest investors in the US — said recently, the question today for investors is not “return on capital”, it is “return of capital”. So if the professionals are worried about the Irish banks, shouldn’t you be too?

We are in a new epoch, where it is necessary to think the unthinkable. It is only by questioning the spin, hype and lies of vested interests that we can arrive at something close to the truth.

At the moment the vested interests are circling the wagons and dismissing any concerns about the viability of Irish banks as wild speculation. They did the same three or four years ago when a few questioned the sustainability of the housing boom. Back then, those of us who said that the housing market would collapse were ridiculed and branded traitors, extremists and unpatriotic.

It is important to appreciate that what was branded extreme last year is now mainstream. Consensus-thinking has moved dramatically. It is now commonplace to hear ‘experts’, who last year were saying that the Irish fundamentals were strong, now claiming that we are in for a protracted recession.

The lesson of the past year is that the experts actually “know nothing” and therefore, you have to trust your own instinct and analysis. It’s your money after all, and if it disappears no one will cry for you.

So with that in mind, let us analyse the Irish banks. At the moment, for some reason best known to themselves, the experts are telling us that the banks are in decent shape. Last Saturday, I mentioned the possible weakness of the banks during ‘Saturday View’ on RTE1 radio. The Minister for Finance reacted to this reasonable concern by saying such talk was “dangerous”. Now I can understand the minister’s position, but suggesting that questioning the establishment is dangerous means that we have not learnt anything. Years ago, questioning the housing mania was also described as dangerous. When the establishment tries to muzzle questioning, you know we are in three monkeys territory — hear no evil, see no evil, speak no evil.

But back in the real world, we know that the banks are tightening their belts. They are not lending. The Central Bank’s monthly figures on total lending in the economy show that bank lending has fallen off a cliff. So what are the implications of this macro trend for individual banks?

Banks work in a very simple way. Typically, for every €1m in capital they have, they can lend out €10m. The profit is the difference in the cost of capital and money they borrow to lend and the interest rate they charge. If a bank is paying 4pc for your money and charging 8pc, it is making 4pc times €10m — a gross profit of €400,000. That is a whopping 40pc return on invested capital.

Of course, they have to be able to take some losses. If they had a €500,000 loan go bad, that would have eaten up all their profits and dipped into their capital. Now they would only have €900,000 in capital. That means the bank could only make €9m in loans. Either the bank will have to raise more capital from investors or reduce its loan portfolio, in addition to writing off the bad loan.

It’s easy to see how bad loans and defaults can rapidly turn a ‘strong’ bank into a ‘weak’ one. To keep lending, the bank has to go back and ask its investors for more money. However, as share prices have been falling, investors are reticent to lend to the banks.

In tandem, as house prices fall further, and unemployment rises, the bad debts in the banks will increase exponentially.

Thus, the bank in a downturn is caught between a rapidly deteriorating balance sheet and an inability to raise money. The bank still has to pay out interest on its deposits, but if it’s not earning interest on loans because they are being reneged on, it can’t pay deposits without raising more money from shareholders.

Like so many aspects of finance, the game is a confidence trick. If that confidence evaporates, as it has done in the US, depositors naturally get worried.

To make matters worse in Ireland, we know that at the height of the boom, the Irish banks were borrowing close to 50pc of their financing needs, not from depositors like you and me, but from overseas investors.

These loans have to be paid back too. Therefore, as the economy slides, the Irish depositor is in competition with the foreign investor as to who will get their money back first. This is when the crisis becomes a reality.

Who can say that over the next two years, this will not happen in Ireland? If it happened in the US this week, only a monkey can rule out the same here.


  1. John

    David where do we put our savings if they are not safe in the banks…Help!!

  2. Paul

    Lets all rush to the bank and withdraw everything!

  3. Lorcan Roche Kelly

    John, under european regulation, your savings are ‘safe’ up to €20,000 whatever happens your bank.

    If you have decided to invest in banks shares, there will be no protection for you.

    Unlikely as it is for an major Irish bank to collapse, it is unthinkable for the Irish government/central bank to allow it to happen. Fannie and Freddie are just the latest in a growing list of bank bail-outs. Northern Rock in the UK, and more recently Roskilde in Denmark have also been saved when the chips were down.

    So, if it’s needed, it will happen here. We may not like it, it may be ‘unfair’ but it is what is going to happen.

    If Ireland had any tradition of prosecuting white-collar crime, (you did call it fraud, David) then we might have proper accountability, and perhaps a smaller mess to pay for.

    As an aside, just checked up the Fitch ratings for some Irish Banks.
    Bank of Ireland : AA- Outlook: Stable
    Allied Irish Bank: AA- Outlook: Negative
    Ulster Bank: AA- Outlook: Stable

    So, take your pick. I should point out that these ratings are at least a month old.

    Lorcan

  4. Liam

    how much does the state guarantee in a bank account if a bank goes tits up ?
    in the UK they up’d it to 35,000 last october in light of northern rock

    I am just guessing that there could be runs on BoI/AIB in the near future

  5. MK

    Hi David,

    Yes, the Fannie Mae and Freddie Mac bailouts show to some extent how bad things have become in the US system. We must remember however that both of of these similar institutions were de-facto governmental backed anyway, so fundamentally, nothing has really changed, apart from the fact that this move is yet another admittance/measure of how bad things have become in the US.

    > If anything, our property boom was more ridiculous than that of the US.

    Yes, but also perhaps No. Each market has its nuances and a lot depends on who the loans were given to, their ability to pay and the level that properties drop and lwhere osses become crystallised. ie: the bottom of the drop. There are examples in the US of houses that were bought at 300k, and then were sold at auction when foreclosed for 8k (yes, Eight K!). These usually were then get boarded up (there are no renters), become vandalised, etc, and reduce the values of other better properties in the neighborhood further. A negative spiral.

    In the US, their frenzy was caused in part by giving out loans to all and sundry. Salaries were readily falsified, and with ARM’s (low interest rate lstater oans) it meant that many unsuitable people (even unemployed people) were buying homes. Their frenzy came on the back of the dot-com bust, the telecoms slowdown and the 9/11 ‘correction’ with resulting historically low interest rates. The US Fed provided very low interest rates and liquidity. Too much liquidity and too much credit.

    Ireland’s property bubble is different. How different, we dont know yet. Yes, we gave out loans to too many as well, and too much, but our burst may be less severe than the US’s. We dont have 300k houses being sold for 8k, not yet anyway. We certainly have an over-supply and a slow-down in demand. The US system was helped by Freddie and Fannie’s presence which underpinned the mortgage market, established since 1938 as a solution to the then depression. Freddie and Fannie were mismanaged as well which didnt help their viability.

    > suggesting that questioning the establishment is dangerous means that we have not learnt anything.

    I fully agree. But then you were talking to a politician, an amateur, not an economist. Politics can be about what you say and how you say it. In a way, their job is to talk the talk and talk things up, not to critically analyse and tell things like they are. And in a trust model, perhaps there is something to be said about not talking things down by those who talk the talk.

    > They are not lending.

    Banks are just now more careful at lending. They have gone back to the pre-boom rules, the rules they should have maintained all along. But like lemmings going over a waterfall, they all made the same mistakes perhaps mistakenly thinking the rules had changed being a part of the ECB, etc. In hindsight, it was foolish. But they will now lend, to anyone that is buying. The catch is that people arent buying. And not the right credit profile of people want to buy. Its not a case of the banks not wanting to lend to good quality loaners. They do. They really do. Having more good quality loans will inceras their asset quality and reduce the percentage of potential bad loans.

    > Like so many aspects of finance, the game is a confidence trick.

    Well this is what worries me. At some stage, the global stage, we have developed so many complex levels of financial instruments that create ‘virtual capital’ and liquidity which is borrowed from future workings, that at some stage there could be a large, very large snap-back, a complete loss of trust in these trust systems and the model could fall down. It may or may not happen, but the risk is there and becomes greater the more exotic our financial system and ‘confidence tricks’ become. If anything, the global credit crisis and correction we are now witnessing may actually reduce such a doomsday risk.

    > Lets all rush to the bank and withdraw everything!

    Well, lets not. If we all did that at once around the globe, the world economy would come to a halt. It would be a doomsday scenario. You see, there is not enough money. In fact, we’d be lucky to get back on average 10% of what we think we have. And the money we would withdraw would then become worthless anyway, worthless as in the same value as a piece of paper, a coloured piece at that. As useful as a reichmark, perhaps even less useful.

    In terms of the Irish banks, we just dont know if any of them will go bust, if one of them does have problems, there may be other European-based banking suitors that may buy them out, etc. I dont think our Government should save them, and I am predicting that they wont have to. There is no guarantee that my prediction or anyone elses will be correct though. Caveat Emptor.

    MK

  6. david parry

    Dave, where would you recommend people should emigrate to?.Western Canada, Northern Australia?.The dopey euro was the undoing of the Irish economy, interest rates that were zero in real terms and now an overvalued currency against sterling.Watch out Cowen’s about!.

  7. Philip

    My main concern is that liquidity for production has dried up…not just in Ireland, but for a lot of the world. IDA’s favourite fallback to US MNCs who are all suffering from this and this leads to lowered demand from hard pressed customers (due to lowered employment prospects). So really, irrespective of how well the banks survive here, the bulk of their customers will be having more and more problems in the coming months and this is THE PRIMARY ISSUE that needs addressing. People drive an economy – not banks. Furthermore, if people are out of work for more than a few months, they de-skill and productive potential of the economy falls – so no matter what incentives you give to FDI, the intellectual grunt needed to drive it will be weaker.

    I do not know how to assess the real value of the property in the market. I think it is far lower than people realise and I suspect that investors in banks here are making some calculations as follows… Our total outstanding mortgage value is about 150bn…70K per working head of population. And when you add other non-Gov debt, you are probably heading for 200K/ working head. Now, using old fashioned 2.5times salary rule, you need a salary of about 80K. That’s a senior managers salary – and we do not have 2Million of them either. And worse, more and more are loosing their jobs.

    If the Government is to prop up a few banks with taxpayers money, it’s the equivalent of sitting on the outside of a dead branch you are cutting off a tree. Their belief is that the MNCs and the world economy will recover in time. I too believe it will recover…but by that time (3-5 years), the fragile economic fabric which is Ireland Inc will be seriously compromised by a deskilled population with no money to jumpstart it for a long time.

  8. mishko

    @David Parry:

    How about emigrating to a Failed State?

    http://www.fundforpeace.org/web/index.php?option=com_content&task=view&id=229&Itemid=366

    Little exposure to sub-prime in the top 10, no ties with Fannie or Freddie (if we avoid nos. 2 and 8), inflation making good old barter necessary again, you can grow fruit and veg all year round in most of them, what are we waiting for?

    And guess who comes in at No. 174?

    Ah, but that was in 2007!

  9. Gerry

    Just saw on CNN that Lehmann Bros losses for year to date is almost 4 billion and its investment division will be sold……..needless to say for a song and who knows to whom! I am no economist but this is worrying…..if the major banks in the US are sinking both private and semi-state entities surely this has global implications……..Jim Rogers of George Soros ilk hails that all bank should be left tank………if only to face the recession head-on thus ensuring a swifter though a painful recovery in the medium term.

  10. sue

    Excellent point Phillip, we really need a strong leader who can guide us through these challenging times, but I for one would have little faith in the current leadership…raising taxes is not going to help us out of this mess….this will just damage our economy further . We need to slash the public service budget and invest in innovation and energy saving technologies…but this couse of action while simple to achieve will not be taken because of the lack of foresight of our leader.Who will revert to the old worn strategy of raising taxes and reducing the spending on vulnerable sectors of our society.

  11. Malcolm McClure

    Excellent article David. But then Paul suggested “Lets all rush to the bank and withdraw everything!”
    Let’s just picture that scene and its consequences.
    Scribbled notes taped to all the ATM machines ‘Out of order’. Bank doors locked. Angry depositors milling about outside. Rush to the supermarkets for cashback. “Sorry, tills are low and we need our money for change.”
    Offer to pay with credit card. “Sorry, cash only today–pin machines are down.”
    “But the banks are closed and I need baby food for little Twinkie.”
    “Can’t give credit–it’s against company policy.–Try Lidl.”
    Crisis escalates. Filling stations closed. Food stores beseiged. Shelves quickly empty of essentials, Rice, potatoes, sugar, cans of beans, bottles of spirits, radio/torch batteries, all basic goods needed for barter. (I’ve seen this actually happen in a foreign country’s capital city and it’s not a pretty sight.)
    No, let’s everybody keep our heads. After all, we are well versed in hypocrisy; Let’s pretend the politicians optimistic words are justified and leave them to dig us out of this mess.

  12. David another honest article to a degree as I would not say you really think the same could happen to us within the next two years.It will take less than that time frame
    What is happening now in America is building up momentum at a quite extraordinary pace. We had Bern Sterns back in March, Fannie and Freddie last week now Wachovia their fourth biggest lender is in serious trouble along with Lehman Brothers so we are seeing a domino effect or the financial equivalent of the perfect storm within the US markets as right across the board over there every thing is falling real estate, retail general sales, auto sales ,electrical and household goods along with unemployment now over 6% and groceries gone up 8.6% in July. Along with a member of their senate now questioning the whole structure of the financial system they’re presently operating under
    Right now we don’t know exactly to what extent our banks are tied into the US market or who is holding their borrowings.One thing though is certain our Irish Listed companies with operations in the states will have very low returns this quarter.
    Unfortunately our civil servants working within the finance department are living in a cocoon and none will have either the courage or foresight to recommend any suggestions as to how we could begin to turn our small economy around.
    Our bankers though who are stuck with deprecating developers land banks should start talking with the Saudi bank SAAB they are looking for land to grow food to bring down their $12 billion imported food bill which is growing at a rate of 19% the last four years.
    And I would love to see the Saudis taking over one of our Banks and putting it’s management out in the rain to plough the fields for them

  13. Ger Kennedy

    @Brendan W

    If some Saudi Outfit buys one or more of the banks then the “management” (I use that term loosely) will be outa there faster than a speeding bullet with their familial nest-eggs safely tucked away and living in Portugal laughing at the eegit oil money that bailed them out of a really nasty mess. They wont be out ploughing in the rain anyway.

    On a more agricultural note, it isn’t a good idea to be ploughing in the rain.

    Ger

  14. Malcolm McClure

    Brendan W said: “And I would love to see the Saudis taking over one of our Banks and putting it’s management out in the rain to plough the fields for them”. Interesting suggestion that would probably influence many Irish to become muslims. Islamic banks are precluded from charging interest from those of the muslim faith. This used to be the case amongst christians and jews too, (with muslims, also “people of the book”) as usury was strongly condemned in their common ethical source, the old testament:
    25 If you lend money to any of My people who are poor among you, you shall not be like a moneylender to him; you shall not charge him interest.
 (Exodus 22:25)
    36 Take no usury or interest from him; but fear your God, that your brother may live with you.
37 ‘You shall not lend him your money for usury, nor lend him your food at a profit. (Leviticus 25:35-37)

    19 You shall not charge interest to your brother – interest on money or food or anything that is lent out at interest.
20 “To a foreigner you may charge interest, but to your brother you shall not charge interest, that the LORD your God may bless you in all to which you set your hand in the land which you are entering to possess. (Deuteronomy 23:19,20)

    13 If he has exacted usury Or taken increase – Shall he then live? He shall not live! If he has done any of these abominations, He shall surely die; His blood shall be upon him. (Ezekiel 18:13)
    1 Behold, the LORD makes the earth empty and makes it waste, Distorts its surface And scatters abroad its inhabitants.
2 And it shall be: As with the people, so with the priest; As with the servant, so with his master; As with the maid, so with her mistress; As with the buyer, so with the seller; As with the lender, so with the borrower; As with the creditor, so with the debtor.
3 The land shall be entirely emptied and utterly plundered, For the LORD has spoken this word. (Isaiah 24:1-3)


  15. Philip

    Back in the ’30s, the DMark was devalued due to having no control over money supply. Central banks now carry out that regulatory function – without question. When this mess blows over, central banks will be in charge of credit supply. Maybe the Muslims were aware of this all along – they invented the basis for our maths today – pity most of us are only waking up to using it now – and that’s to record history rather than predict a major probem unfolding.

  16. @ Malcom
    And if thou sell aught unto thy neighbour, or buy of thy neighbour’s hand, ye shall not wrong one another. Leviticus verse 14. What a great economical thinker this man was too.
    Maybe now that you are studying the Old Books , it might strike you as to what is really going on within our western banking system , This war on Global Terrorism is perhaps just a smoke screen to kill all these Muslims who don’t charge interest on their brothers loans.
    And I wonder what would happen if you went into the Bank’s of Ireland and told them on religious grounds you were not going to pay them any interest on the loan you require ? I’m sure from their front pews they would have an answer for you . May Allah and Buddha and the rest of them be praised.
    But I think we will be saved , according to the scriptures , it will be our money lenders who will burn . Amen to that !

  17. The fixer

    I have been following the writings of one Lyndon Larouche now for quite a number of years when I was first introduced to some of his material at a conference in Berkly. Larouche describes himself as a Physical Economist of the American System of Economics in the tradition of Alexander Hamilton, Henry Carey, Abraham Lincoln, John Kenneth Galbraith, FDR and JFK. At first I thought him a crank but in light of recent developments I have now come to revere him, and when you read Larouche you can’t help but feel that he is definitely onto something.
    About forty years ago with the end of the Gold Standard and Bretton Woods
    system of fixed exchange rates, he identified the conditions which would eventually lead to the unraveling of financial system, now playing itself out on the world stage before us. Larouche has proposed a number of measures
    which he claims could easily resolve the crisis globally, and i am inclined to believe him, and says that the present attempts by the US treasury to bail the system out are pure folly and will further lead to a total irreversible meltdown word wide. If you haven’t already heard of him then allow me the liberty of an introduction:

    http://www.larouchepub.com/
    http://www.larouchepac.com/

    Also for myself I found it particularly useful to understand the science of
    monetary systems and to remove some of the mysticism associated with
    the origin of money. I believe that in order to deal with the present mess a good understanding of monetary systems is essential among the citizenry. A good primer is ‘The money masters’ at;

    http://video.google.com/videoplay?docid=6076118677860424204.

    Also,pragmatically, a good example of a local monetary system implemented to enhance a local economy;

    http://www.ithacahours.org/

    Enjoy.

  18. Longlivetherepublics

    Is there censorship on this post?

  19. Woodsey

    Unlike a bubble built on cash, this one was built on borrowing. When a cash-built bubble bursts, there’s always a little something left in the ‘kitty’. When a bubble built on borrowing bursts there’s just a big air-hole into which the debts and the negative-equities tumble. This is what the banks are now holding as ‘assets’ in their vaults.

    The banks that we were all dealing with this year appear to be exactly the same banks we all dealt with last year. But they’re not. They’ve spent all our money … by a factor of ten … and they’ve lost it. If nobody knows this, there’ll be no panic. If all our salaries keep pouring into the banks’ coffers and they can raise a few extra shillings from attractive deposit rates, then maybe it’ll all be okay. But it’s getting worse in the streets. Our government, which is us, has less money. Our gilts are not TOO attractive on the international market.

    But, ‘Shush, David, don’t tell!’ Telling’s ‘dangerous’!

  20. Skin

    If investors are selling their bank shares, where are they putting the money they receive?? Surely not into the deposit accounts of the same banks that they have lost confidence in??

  21. buzzthewire

    I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

    Thomas Jefferson (1743 – 1826), Letter to the Secretary of the Treasury Albert Gallatin (1802)

  22. @Longlivetherepublics, ‘Is There censorship here’? , while I do not claim to represent Mr McWilliams or to be his webmaster, I say maybe your problem was with loading or a poor broadband connection. On previous posts it is only when you get too personal when you will be blocked out.

  23. Lorcan Roche Kelly

    I think Skin’s point is a very important one. Not so much about where the investors are putting their cash, but rather that they are cashing in their shares.

    The current level of investor risk-aversion, while understandable, is, in my opinion, one of the most damaging long-term effects of the credit crisis. Venture capitalists have always been a rare breed on this side of the Atlantic, but without them the innovative solutions we will need to grow our way out of the coming (current?) recession will fall by the wayside, stifled by a lack of funding.

    I know it is hard to see the long term when the sky is so solidly falling, but to continue the biblical references in this thread, I give you Galatains 7 “for whatever a man soweth, that shall he also reap”

  24. mishko

    @Woodsey: You say “(The banks have) spent all our money … by a factor of ten … and they’ve lost it.”

    I used to think a bank was like the heart of our system, the veins (deposits) bringing in the blood, and the arteries (loans) pumping the blood out. DMcW’s articles and posters like you have made me realise this analogy is false, as the supply of blood in the banking system is not finite like our own; or at least much more seems to be travelling down the arteries than back down the veins. In fact you make it all sound like the Emperor’s new clothes!

    Some are now likening our system to a pyramid scheme. Those who get out first will not lose their shirts, while the majority who stay in will. Is this analogy any more accurate than the medical one? I suspect the truth is somewhere in between, but if anyone knows, then please tell.

  25. MK

    The problems that these banks are having such as Lehman’s, is just another aspect of the property/asset bubble and the credit binge that fuelled it. Lehman is having to write the value of its assets (mainly commercial property vehicles) down to ‘market values’. That was the main factor in their recent quarterly loss. The assets value is lower than they were and hence a loss. The bank has lost business elsewhere as people have been treating it with caution and moving their business elsewhere in case it should go bang wallop. Its a negaive circle and things just get worse.

    But lets remember that Lehman (and others, whether banks, private equity holdings, individuals, etc) built their portfolios of property and businesses and were flpping them, etc, and making large profits based on a an easy low interest credit access system and rising prices. Like a ponzi scheme, in a rising market, everyone makes. Eircom was flipped several times, as a business example. And these credit driven gains were made over many years, 7 or 8. Central Banks were complicit in this by providing too much credit, too much money supply and low interest rates. It was a ‘beer promotion’ on steroids and now we have to pay for it with a large hangover, a very large one. Such a build up will take a while to work out and it will cause pain. How much and to whom remains to be seen. Like the ‘Paddy Last’ analogy, there will be main left holding the baby when the music stops. Lehman are one, as were Bear Stearns as were Northern Rock. So, not only is there Paddy Lasts, there are Sam Lasts, Peter Lasts, etc.

    These ‘hangovers’ can cause recession. How deep remains to be seen? A lot will depend on how the recession is managed, and even how public perception of it is influenced. If we all decide to stop spending discretionary spending, there will be a recession.

    But, we can of course bounce back from such recessions. Trust in cash and money hasnt broken down completely nor will it unless things get a lot lot worse. We are far from that situation at the moment. As long as billions of cash and goods are exchanged every day, sufficent trust in the current system will continue to keep it working. There can of course be pockets of trouble. A Northern Rock here or there, or many of them in certain countries. Whether we have one here, who knows, we do not have visibility on the pertinent data.

    How bad things will get no-one knows yet? Economics is not an exact science, far from it. There are many forces at play. There are billions of people making decisions on a daily basis. Could it all go belly up? Yes, the potential is there as the trust system has gone perhaps too far. This ‘crash’ may not do it, as debt is not being reeled in and a new system deployed. After this storm, the credit will flow again and there is likely to be another boom and bust cycle. If we look at the relatively recent past, we can see evidence of a bust lasting 70 years (1850 to 1920). Whether that will happen again remains to be seen. And life can continue through the bust. This storm may not be a mega-storm. Will we ever witness a mega-storm? I have no idea. But it is possible. And events over the last decade doesnt give us much confidence that such a doomsday scenario will be purposely avoided.

    MK

  26. Ed

    Are we overreacting ?- we know that the American Banking System lost its way over the last decade, but surely in our case, the powers that be are more than capable of doing a risk analysis and acting on it – if not, then the Universities should be closed down. If Napoleon was able to do it two hundred years ago, surely our lot at the Central Bank are up to the task. If we’re going to get out of this crisis, then only positive thinking should be encouraged, based of course on some foundation solid or otherwise and this is where the government has to come clean on the situation – if not, we’re going to waste all our energy going around in pointless circles – Mr. Cowen, give us something real to latch on to !!

  27. webmaster

    Hi

    Please don’t post “test” comments on this site. It is annoying, particularly for those who get email updates when new comments are posted. There are a number of anti-spam comment filters on the site. Not all posts are listed automatically, some are held for manual review which I try to do every day or so. On any given day spammers submit 100-200 spam comments so this is necessary.

    It is rare though that posts are held for review. I can appreciate it can be annoying if you want to post a hasty rebuttal, but the alternative is dozens of ads for viagra and I am sure everyone already has plenty.

    If you are having problems email webmaster@davidmcwilliams.ie and I will have a look.

    Ronan

  28. newname

    I have been following the writings of one Lyndon Larouche now for quite a number of years when I was first introduced to some of his material at a conference in Berkly. Larouche describes himself as a Physical Economist of the American System of Economics in the tradition of Alexander Hamilton, Henry Carey, Abraham Lincoln, John Kenneth Galbraith, FDR and JFK. At first I thought him a crank but in light of recent developments I have now come to revere him, and when you read Larouche you can’t help but feel that he is definitely onto something.
    About forty years ago with the end of the Gold Standard and Bretton Woods
    system of fixed exchange rates, he identified the conditions which would eventually lead to the unraveling of financial system, now playing itself out on the world stage before us. Larouche has proposed a number of measures
    which he claims could easily resolve the crisis globally, and i am inclined to believe him, and says that the present attempts by the US treasury to bail the system out are pure folly and will further lead to a total irreversible meltdown word wide. If you haven’t already heard of him then allow me the liberty of an introduction:

    http://www.larouchepac.com/

    Also for myself I found it particularly useful to understand the science of
    monetary systems and to remove some of the mysticism associated with
    the origin of money. I believe that in order to deal with the present mess a good understanding of monetary systems is essential among the citizenry. A good primer is ‘The money masters’ at;

    http://video.google.com/videoplay?docid=6076118677860424204.

    Also,pragmatically, a good example of a local monetary system implemented to enhance a local economy;

    http://www.ithacahours.org/

    Enjoy.

  29. newname

    My apologies Webmaster. Its just that I had a post with four links and it did not automatically go through
    at first under the name ‘the fixer’, so I had to determine how many links would be allowed to go through without a manual review.

  30. Philip

    @Newname – I just read an article about Hewlett Packard’s R&D findings about people’s use of the web. Guess what, people only use a few sites – ever! and only have a small circle of friends. Being able to access the whole world of information with all the associated garbage and some good bits is just a drag. We are all little villagers who like to feel special even in a small way. The Ithaca concept merely reflects this and maybe all that is happening is a global correction where people are just going home and deciding to work for their more closely with their community. It makes sense – politicians are more distant, popularity wins over conpetence and ability to deliver – the sheer mass of information that is coming at people is causing them to overly summarise and compartmentalise cultures, knowledge and competence under easily digestable metrics that really mean nothing. People start to loose the meaning of value. More than ever we rely on horoscopes, myth and soothing wafflers to reassure our illusion on our grip of reality.

    So, is it any surprise what is going on. Clueless powerdressing popularists attracted by the limelight of a disneyworld enhanced globalisation are finding that the global financial engine that was being revved up (courtersy of the IT & telecoms technology) without governance is about to blow. They built a powerful sexy car using ass & cart brakes (brakes are boring…until you need them). There was no sex in Ireland before RTE…joking aside, maybe this was an a ham fisted attempt on how media and technology has loosened our grip on real values – effectively Entertaining Ourselves to Death (al la Niel Postman) and then making people distasteful of the fact that Debt is a very powerful tool which can injure as well.

    @MK, I fully agree that as long as the billions flow, the trucks keep rolling and the supermarket shelves keep filled – things are OK. My concern is that because of globalism, there are too many single points of failure that could turn the lights out. Say the dollar drops very badly in the coming months or credit really starts to tighten up – this will affect power generation, logistics and …the telecoms…and then the internet – this stuff does not run automatically and things like GPS & Internet are heavily centred in the US. The disruption could be enough to cause panic. The key is to have a slow failure so people can adjust. It’s the shocks – awakening from the trance – will cause the problems.

  31. Malcolm McClure

    MK said: “Trust in cash and money hasnt broken down completely nor will it unless things get a lot lot worse. We are far from that situation at the moment.” – No we’re not. People are just waking up to the frightening reality of their long-term commitments.
    Let’s look at the average Pauric, who five years ago signed up for a 100% bank loan to buy a flat costing €100,000 at fixed rate of 5%. His friendly bank manager said that housing was rising at 10% a year and that would probably continue for as long as the Celtic Tiger ran free. Trouble was that Pauric was nearly broke. ‘No problem’, said the bank manager, ‘each year you can take out a new home equity loan based on the rising value of your flat. That will cover the interest for the previous year and leave you with a similar amount of spending money’. Great! thought Pauric.
    End of each year he maxed his new equity, repaid previous years interest in full out of the new loan and spent an equivalent amount on toys for the kids etc. Everybody was happy.
    After year 1 Pauric repaid 5000 interest and spent 5000.
    After year 2 Pauric repaid 5500 interest and spent 5500.
    After year 3 Pauric repaid 6050 interest and spent 6050
    After year 4 Pauric repaid 6655 interest and spent 6655
    After year 5 the Celtic Tiger was dead in the grass and Pauric found that he owed the bank €146,410 and the years interest was €7320.50.
    He went to the bank manager (no longer friendly) and asked for the usual loan. BM told him ‘No can do. Pay the interest or get out of the flat’.
    This scenario played out a million times across UK, USA and Ireland.
    The penny hasn’t dropped yet.

  32. Woodsey

    @mishko: ‘… the veins (deposits) bringing in the blood, and the arteries (loans) pumping the blood out.’?

    Yep, it used to be that way. But that was back in 1908. Finance became way too clever for that. Nowadays financial regulators allow banks to spend €100 for every €8 they take in. ‘Take in’ can mean the sum of assets, deposits and loan repayments. Loan repayments are a BIG part of the banks’ income stream. For every €8 of loan repayment income the banks can ‘spend’ €100. This ‘spend’ includes €100 loans based on their €8, and the asset you’re offering as collateral. That loan repayment adds to the income stream and the banks carve their ‘income’ into units of €8 and sell it on to boost their income even further. From an €8 ‘acorn’ mighty ‘oaks’ can grow! Monopoly was never like this! They’re all getting a little sweaty now ’cause the assets are diving in value and nobody knows who sold what loan to whom. So the banks won’t do business with each other their vast ‘income stream’ has dropped way off. That means they can no longer lend and that cramps up our spending of money we never had in the 1st place. If we stop spending, shops stop selling, people get laid off and spending drops further. The ‘remedy’ is the same as the one for the common cold. There ain’t one. Unless you call going to bed and sleeping it all off a ‘remedy’? Set the alarm for 2012 … if we’re lucky!

  33. paul

    Have a look over at thepropertypin and search for “What Happened in Japan When the Bubble Crashed in the 1990s?”
    http://www.thepropertypin.com/viewtopic.php?f=19&t=12424

    It’s the second great depression and we are following the same pattern as the 1930s

  34. Deco

    Malcolm McClure not meaning to offend your religious sensitivities, but the Old Testament of the Bible was written before Central Banks discovered how to inflate currencies. As Ben Bernanke said “we have the tecnology” (i.e. the Printing Presses). People require interest to make up for the losses incurred by reckless central bankers, and the politicians who are continually appointing them.

    Regarding rescuing the Irish Banks. This is a complete waste of taxpayers money, just to save national pride. Absolutely disgraceful. Bear in mind that both Bank of Ireland and Allied Irish Banks shareholdings are over 40% owned by American institutions. Permanent TSB has a fairly hefty investment from British Banking Insitutions also. Ulster Bank is a subsidiary of a British Bank. And National Irish Bank is a subsidiary of a Danish Bank. In aggregate the Banking Industry is mostly foreign owned. This is something which has not more or less foreign owned. Therefore if these banks collapse you will find a lot of the brunt being carried by people who live outside the state and who have made a lot of money on dividend and capital gains. In the same regard, you will probably find the American Embassy and the British Embassy arguing with our supposedly sovereign government faster than you can say CIA. But as a taxpayer, I will not vote for a political party that improvrishes the people to keep the rich rich. And that is without discussing the fact that ECB will probably call the shots in the context of the regulatory framework. Based on the failed banks in Germany over the past year as a result of the Subprime Crisis, I think it is safe to assume that the ECB will let the market decide the fate of any irresponsible bankers. And the government will have the choice to intervene if it wishes, and place the debt borrowing ratio out of kilter.

    Besides anything else, the retail Banks have behaved in an exhorbitantly monopolistic fashion in the last ten years. They deserve neither our sympathy nor our subsidies. We have yet to see the real impact of the excessive ‘buildout’ of commercial property hitting the market. Everywhere you go now you see empty retail outlets with status ‘to let’. The owners are paying interest to the banks but receiving no income. This is an insolvent position. This must end. It is a virtual certainty. When it does the market for commercial property will collapse, and then we will start to see the real headaches. Then we will also see the total inadequacy of having a bunch of solicitors sitting around the cabinet table. Then the execessive wining and dining of yesteryear will hit the fan.

    Currently the government’s strategy is
    i) talk things up / reassure everybody that it is not really that bad
    ii) do everything to please the IDA, and have the IDA working flat out to prevent large multinationals from leaving
    iii) be nice to the unions
    iv) not annoy the civil servants/public sector
    v) appear to be very serious about the issue.
    vi) sneak in as many stealth taxes as possible to pay for the public sector largesse.

    All these actions are of no material significance to actually bringing down the cost base of the economy / improving the infrastructural bottlenecks. With Dell probably leaving, and rumours running wild in North Kildare concerning Intel, one must surely wonder will the key government cabinet members will ever sober up and get a proper grounding in reality. Or maybe we have to wait until an election defeat before that hits us. I don’t think the opposition are any more clued in to what is going on. The real problem is that the entire political body thinks like a public sector organization.

  35. The bail out of the Freddies was inevitable -but of course totally wrong. Nevertheless it has probably staved off a global monetary crisis.It has solved some of the problems for banks such as our own B of I and AIB etc.The next step to “bail out” the irish banks is to help the builders off load their unsold stock.if the builders can be saved-the banks will be saved.!
    We are told the government will bring in steps to resolve this shortly.They include a massive buy out of new housing units for everybody, from the unemployed -to the low waged families on the long housing lists.
    Suddenly this government has a heart.!
    For years they did not even take the affordable housing quota from builders, as applicants queued yp to buy at full price. They happily took the cash in lieu!!
    Now it is open season for everybody.Even the dogs in the street can apply.Nobody will be refused, for lack of cash or earning potential or whatever.!
    The hostels for the homeless,the impoverished,the poor will empty-we will buy and rent you a nice apartment-or so the theory goes.
    There is even talk of a plan for local authorities( yes, the formerly cash strapped ones) to take a 50% equity in first time buyers properties-a scheme similiar but more grandiose-than the current “Affordable homes” project.
    No mention of where the cash for all this will be found-the national pensions fund? borrowing abroad.?but when it comes to giving their builder cronies a “dig-out”-found it will be.!
    I have drawn up a proposed poster, to help launch the cheap housing campaign, countrywide.
    The two Brians are welcome to use it free of charge.(I know about the cutbacks).
    It´s here at: http://www.soldiersofdestiny.org Ta.!

  36. [...] an eacnamaí David McWilliams i mBaile Mhuirne oíche Dé Satharn agus é ag seoladh dluth cheirnín nua ar son an cheoltora, [...]

  37. Mr Cowan said (today) re housing:
    “The Government will help those who want to buy a home but are experiencing problems obtaining credit, but will avoid anything that would artificially inflate house prices.”
    Is that a classic oxymoron?
    Should he have (honestly) said:
    “The government will move heaven and earth, to ensure that the builders continue to prosper”

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